Income Inequality: What’s the Right Amount?

Summing Up Comments were large in number and broad of opinion reflecting on Professor Jim Heskett's question, Does income inequality promote or stunt economic growth? Is there a "right" right amount of income disparity?

by Jim Heskett

Summing Up

Are Education and Mobility the Keys to Reaching the Right Amount of Inequality?

Questions about the right amount of inequality provoked thoughtful comment this month about the nature of the question, definitions, measures, and appropriate actions to ensure that we achieve it, whether inequality is measured in terms of opportunity or the actual accumulation of varying levels of income and wealth.

Inequality is inevitable and perhaps necessary in a free society, according to one line of thought. As Guy Higgins put it, "Inequality in the distribution of wealth is necessary for … progress… perhaps we should be focusing on trying to understand what the incentives should be that support a useful and perhaps better level of inequality." Referring in part to differences in per-capita income distribution among countries, Shadreck Saili said, "I have a strong feeling that productivity flourishes where income disparity exists to a greater extent." Susan Rushworth offered "food for thought" in citing research that led her to conclude that "the faster the economy grew (as measured by GDP), the greater the income gap."

Most expressed the view that increasing inequality, at least in the U.S. and U.K., has positioned those countries in excess of the "right amount." Among those supporting this view were Bob Dillon, who commented that "Greed seems to have overtaken some of us." Doug Gabbard, citing his research, said "… a year-over-year decrease in the Gini Coefficient (increasing equality) is strongly (and linearly) associated with an increase in household income." Steve Scheinkopf agreed, saying "I used to be an Ayn Rand capitalist, but compassion and a better spread of wealth actually works better in business and society."

The right amount of income inequality may be hard to determine, but respondents to this month's column offered up a number of measures, some more straightforward than others. Comments suggesting that right amount included: "the point (at) … which entrepreneurship is depressed …" (Yaron Kaufman); "when motives switch from serving to grabbing" (Gerald Nanninga); "the amount that allows the stakeholders to know 'we're all in this together, and apart from our natural not manmade limitations, we all have just and fair opportunities for similar achievement'" (Dennis Nelson); "the level that … does not allow segments of activity to capture regulators or regulations while also ensuring support for the disadvantaged and those in poverty" (Peter Bowie); one that promotes "… open competition. We reach a point of distorted inequalities when we begin to legislate in favor of consolidation." (Victor Paredes); "The points on the curve which would describe the decline of democracy." (T. Reilly).

There was support for the idea that mobility is one answer to inequality. Wayne Brewer, citing research that concludes that income mobility has not declined in the US, said "This metric of income inequality (ignoring mobility) causes meaningless chasing of rainbows… Folks move up through the quintiles of earning all the time … (therefore mitigating the issue for any one household)." While disputing Brewer's figures, Joe Seydl cited another more basic remedy for inequality. In his words, "The key to improving mobility is to improve educational experiences at the earliest age possible."

This debate gives us something to think about: Are education and mobility the keys to reaching the right amount of inequality? What do you think?

Original Article

The most pervasive theme of 2011 may well have been that of "inequality." The global "occupy" movement provided a constant reminder of the need to at least revisit a timeless issue: the unequal concentration of income and wealth among a country's citizens.

Some view inequality as the natural result of freedom, a free market economy, and capitalism. It appears to work best when those with the wealth create jobs for others. This seems to have been the thinking behind Chile's successful economic revival, for example, where the concentration of wealth is very high.

Others view inequality as a potential drag on the economy, a deterrent to the development of a strong, large middle class, which in turn is considered essential to economic growth and development. This apparently was the thinking in Brazil, where the government has stepped in with the intent of providing an added boost to a remarkable period of economic development by reducing inequality through the distribution of money to one-fourth of that nation's population.

In Brazil, the government maintained a disciplined fiscal and monetary policy, resisting the temptations to which much of the rest of the developed world succumbed. At the same time, it created elements of Bolsa Familia, a "family grant," that provided substantial outright payments to low-income families as well as incentive payments to those willing to do such things as send their children to school and get them vaccinated. For whatever reason, the concentration of wealth is much lower in Brazil than in Chile. But these countries represent two of the few bright spots among the world's economies as well as two very different philosophies regarding economic equality and the role of government in promoting it.

It would be hard to find anyone arguing for the extremes of complete equality (everyone with the same income or wealth) or inequality (with all the income and wealth in the hands of one household), something captured by what is termed the Gini Coefficient which ranges from 0 to 100 for these two extremes. Some inequality may be necessary to incentives for work and investment. But some equality is necessary if markets are to be created that support the investment.

A recent study by Andrew Berg and Jonathan Ostry concluded that the distribution of income is a more important contributor to sustained economic growth than such things as openness to trade, a competitive exchange rate, level of foreign investment, or the quality and stability of a country's political institutions. At the risk of oversimplifying a complex analysis, these economists conclude that "Over longer horizons, reduced inequality and sustained growth may thus be two sides of the same coin." If we were to graph economic growth vs. the Gini Coefficient, it would probably show some kind of parabola in which the highest rate for sustained economic development exists at values somewhere between the extremes of 0 and 100. But just where is that?

The questions this raises include: Does inequality promote or stunt growth, and at what stage of development? Does the paper raise a red flag, say, for the U.S. where inequality of income has grown at an unprecedented pace in the past thirty years and now resembles that of some lesser-developed economies? Has the U.S. passed over the peak of the parabola of our hypothetical graph? What's the right amount of inequality? What do you think?

To read more:

Comments

Yaron Kaufman

CMO, OneHourTranslation.com

The right amount of inequality can be determined by the point in which entrepreneurship is depressed and reduced. This point is different, of course, in each country, and can be influenced by political, social and cultural factors. Entrepreneurship and small businesses founders are the locomotive of economy and I believe that entrepreneurs do not disappear in unwelcoming climate: they simply go to do their business somewhere else.

Steve

Q9C Quality Consulting

History suggests that extreme inequality and decay go together, just as low to moderate inequality goes with growth. It seems like a chicken-or-egg conundrum, though. Does one precede the other or are they concurrent? How strong is the correlation between inequality and growth or decay?

Anonymous

"It appears to work best when those with the wealth create jobs for others. " How many of rock stars and football players making exorbitant amounts of money are hiring? This is the lie that perpetually keeps the US economy down. Governments are supposed to take care of "we the people" and those most in need - e.g. elderly, disabled, vets, impoverished children, etc. - not just the rich who justify inequality with the American Dream myth which ignores deeply entreneched systemic realities.

In Canada there is good, free healthcare - not unlike the US, where I studied/worked - only it's FREE. The rich should be taxed at higher rates and it's about time America started turning off insular news programs and realizing that higher taxes on uber wealthy corporations should contribute to the whole societ. It is not a wrong or socialistic thing - it's the humane and morally just thing to do.

Additionally, the US should heavily tax it's cigarettes and alcohol to help eliminate its debt, as Canada does - contributing to the whole society. I'll take Canada's "Peace, order and good government" over the US' "Life, Liberty and the Pursuit of Happiness" as it stands. All nations should strive for a systemic view and realize that the world's economies are interconnected, not dependent on simply worshipping almighty corporations, regardless of worsening personal and social peril.

Bob Dillon MBA '55

EVP, Sony - retired

Not sure where the peak of the parabola is, but I believe that it's far to the left of where it is now. Greed seems to have overtaken some of us. We need sacrifices across the board in the form of higher taxes on the more affluent and changes to curb the cost of entitlements. WW2 brought shared sacrifice. Where is that today?

Anonymous

Once the Supply Siders own everything, there needs to be some demand for the products. "Chicago School," "Free Market" "Supply Side" economics taken to its uncontrolled extremes serves to create distorted markets for "luxuries." Contrary to sound economics, prices for singular or scarce items continue to increase even while the items are hunted or fished to extinction on one hand, or replicated to irrelevancy.

f. gregg bemis

Asking "Whats the right amount of income inequality " is like asking what is the right amount of free speech.

Gerald Nanninga

Principal, Planninga from Nanninga

3 Short Stories come to mind:

I was talking to a top executive of Enron shortly before their collapse. I said that Enron had a reputation for working its employees through insanely brutal hours and pressures--all for a potential shot at insanely high stock options. I asked if they had trouble finding people to put up with such a harsh work environment. I was told that they had lots of applicants, especially from investment bankers.

I saw a survey once which asked investment bankers if they would stay in the profession if their insanely high levels of compensation went away and they got more "normal" wage levels. Somewhere around 75 to 80% of the investment bankers said they would leave the profession under those circumstances.

I was to interview for a job at one of the largest banks in the US shortly before the banking collapse. The headhunter wanted to pre-screen me because she said the bank had "a particular culture" which is not a good fit for many people. In the course of the pre-screening it became apparent that the "particular culture" was people focused on greed, status and conspicuous consumption.

And of course, Enron, the banking industry and investment banking have since gone into terribly poor situations. As Willie Sutton said, he robbed banks because that was where the money was. In the same way, modern-day "robbers" seek out jobs with obscenely high rewards (where the money is). And they leave destruction in their path.

What you want is people running businesses because they want to run that business. If they are only there for personal gain and really do not care about the profession, then you get the Enron and banking collapses. Pay less and you only get the people who want to be there and want to serve (rather than those who are bribed to be there--and would not otherwise be there).

What is that amount? It varies by person. The idea is to look at when motives switch from serving to grabbing.

Final story: An executive at a company told me they had to pay such high salaries in order to get that caliber of executives. Since I was not impressed by the caliber of his executives, I responded, "Does that mean that if you paid less, you'd get a different--and better--caliber of executives?" I still stand by that statement.

Anonymous

IMHO, income inequality at present comes from mainly from two very different directions: tax code and simple greed. Although not as extreme, like pre-Thatcher UK, executives are compensated in ways other than straight salary for tax purposes - this skews every decision towards immediate rewards rather than the long term health of an organism. This stems from personally enriching decisions (Much like our "lawmakers" coffers are enriched by the lobbyists and exempt from most laws they foist on us. ie: health care.)

In our system there is no longer any connection between between creating value and compensation. (Witness the bankers that took their companies into bankruptcy and were bailed out by the congress via the taxpayers and collected fat bonuses anyway. (I am so tired of hearing about these naked emperors: blah, blah, blah "we need to hire good people", "their contract states...")

The disincentive to work is also a result of our tax system, and rather than creating equality, our system has created a permanent underclass, that sees no way out, at the expense of an ever expanding government bureaucracy to feed the beast. It is not sustainable to have a system where the 3/10 underclass is "managed" by the 4/10 bureaucracy and paid for by 2/10 working middle class and the "1%".

I see it all around me, the 2/10 are becoming largely unmotivated because they have grown tired of feeding the beast, and the "1%" can afford to continue to lobby on their own behalf. What a monster we have created!

And yes, I am sure the academic community has a much more eloquent and sophisticated perspective on this and charts to explain it all, but I put our current mess squarely at the feet of our leaders in Washington.

Doug Gabbard

Project Consultant, FCS Group

I pursued this question within the United States. Based on data provided by the American Community Survey Brief, "Household Income for States: 2009 and 2010," a year-over-year decrease in the Gini Coefficient (increasing equality) is strongly (and linearly) associated with an increase in household income. Interesting.

Phillip Clark

Clark & Associates

"Supply side" and "Free Market" societies and economics does not exist. It is a lie and should be recognized as the ultimate con game. Anyone even stating these principles should be locked up. There is always someone controling supply...so how free is it? Whether a government or private industry...someone is always controling policy or commodities.

So what should we be looking at to attain a stabilized yet growing economy? How about the ability to participate in an economy. With more wealth in fewer hands, fewer people can participate and move the economy forward. Don't give me the false argument that the rich create jobs. IF that was the case, why isn't the economy booming? Also understand that when the wealth distribution goes out of kilter, only revolution or the government can bring it back toward the center.

The other lie is that blaming the government for all our ills is okay. Give me a break. Many of the prosperous companies feed off the government like hogs. Tax breaks, government contracts, regulations favoring business competiveness, free use of GPS, roadways, etc. The list is endless of the public benefits toward business. Do individuals have the right to write off their expenses like a business?

History has shown it will change. The how and when is up to us.

Dennis Nelson

Quality Lead, SFS

To discuss how to get the most positive sustainable growth, the wrong term and question are being used. The terms should be "just" and "fair"; and the question should be "What is just and fair?" It's not just the "inequality" of incomes or wealth that is at issue, it is all of the injustice and unfairness which permit the inquality and of which the inequality is just a symptom: the tip of the pyramid. Injustice and unfairness bring down economic, political and all other entities. The breakdown may take days or centuries, but the breakdown is inevitable. Individuals subjected to economic inequality or any injustice and unfairness may be unable to articulate their situation, but they know it exists. They will tolerate the injustice and unfairness until it either or both directly threatens their and their loved ones lives, and/or eliminates any hope of rescue from their demoralizing situations.
Long before the open revolution is evident, they will begin to work to erode the existing situation covertly from within. Exactly how much more is a certain skill set or amount of experience worth for, say, a CEO versus a line worker in a given situation? Only the amount that allows the stakeholders to know "we're all in this together and, apart from our natural not manmade limitations, we all have just and fair opportunities for similar achievement." There is no "right amount" or "time" for inequality except for those who believe short term gains are worth long term costs or who don't understand that there are long-term costs. The less inequality, the more justice and fairness over time, the greater the rewards for all the stakeholders, and not just economically.

Peter Bowie

Independent Director

As noted in the article, a level of income inequality is inevitable in any dynamic economy, but it is unlikely there is a particular formula to determine the specific level that is both acceptable to society broadly while also optimizing growth. Perhaps the optimal level of inequality is the level that results from an economic environment which allows for equality of opportunity and does not allow segments of activity to capture regulators or regulations while also ensuring support for the disadvantaged and those in poverty.

Dr. Phil Harris

Founder and Principal, APGAcademyofEntrepreneurship.com

High income inequality drains economic growth because it inhibits fair competition. Small business entrepreneurs fill gaps in supply and demand that monopolies fail to fill by responding to the needs of the people (consumers) (Baumol, 1990; Baumol, Litan, and Schramm, 2007; Honig and Dana, 2008).

Monopolies use supply side economics to raise prices and become less efficient. Innovation and creativity is thwarted because income inequality offers less access to capital for entrepreneurs who drive economic growth, innovation, and jobs. As large companies become mature, without small business, "creative destruction" (p. 70) becomes inevitable resulting in declining social values (Schumpeter, 1994).

The question one should ask is what can this country do to promote entrepreneurship and overcome the influence of companies "too big to fail." Without the ability to fail, socialism replaces capitalism (Schumpeter, 1994). So why is no one asking?

Regarding the extreme inequality today, how is it good business for people to suffer? Especially the vulnerable, sick, elderly, children?

Joanna

Buiness Analyst

assumptions need here to be questioned:
1. The real job creators are the consumers of goods and services. If no one buys your goods & services you cannot hire anyone no matter how many factories you build!
2. The market does not come with a level playing field. It may be free, but certainly NOT fair.
3. Incentive to do better is not dependent on inequality. Rather, doing better assumes that the game is NOT rigged and that efforts will indeed be rewarded.
4. Instead of focusing on inequality, the focus should be on fairness. Not having wealth should not automatically create inequality in a country's standard of living.

Donna Morton

CEO, First Power

10:1 ratio was the ethical imbalance for Plato, any disparity greater lead to social ills. I think this number could hold up today and inside corporations where bottom and top were separated by such a ratio. Certainly the wider gaps in countries correlate to social harms. Look at US versus Japan for example.

Gerald W. Bollman

Chief Investment Officer, Intrinsic Value Asset Management LLC

The usual discussion of income distribution is clouded with ignorance of the distinction between wage and capital income. Business owners often are compensated not only with their returns to ownership but also their contributions as managers. To equate ownership income with salaries and ownership gains is not only misleading, but explicitly deceptive. We need better data to understand the disparities among wage earners. To lump all income together makes the discussion ridiculous.

Hugh Quick

Sitting, Home

Whatever criterum is applied people are not equal, so equal pay for all is nonsense. This is so obvious that I thought that I should not send it then I thought of many things that are obviously wrong but are still believed,e.g that gadgetry can solve human problems

Geert

Executive

Certainly a valid question, but I would also challenge the assumption of what it is we're trying to achieve -- in the line of thinking presented in this article, the assumption is that economic growth is the target.
Quite a bit of data however show that GDP per capita itself is no longer a predictor of standard of living above a certain threshold. I'd much prefer the analysis to be about maximizing standard of living.

Joseph J Jarfas

Retired, None

"It would be hard to find anyone arguing for the extremes of complete equality" - I would be one!:-)

Taking an 'extraterrestrial' view: We have this dirt ball here, with seven billion people - human beings - and counting. The total surface of the earth is around 510 million km square (including water); if you divide the population on this surface, each and every one newly born has a 'birth right' to around 13 hectare (which will shrink of course as more are born). Now just take a one km deep layer of this dirt ball and 'calculate' the mineral wealth it contains - including the water. Just the top one km!! Why isn't every newborn a millionaire? Because we are all working for 'ourselves' rather than for humanity. So each (most) individual in the human race 'races' to grab as much of the wealth this dirt ball offers as s/he can. And therein lies the problem ...

Nobody ever asks the simple question: Can American society (the whole population) or even the total human population of the world (now 7 billion) produce what they need? Without any financial system at all?

If we could share resources, make everything we need, why do we need money? And millions of 'been counters', bankers, brokers, government bureaucrats (and all those economists!) who are not adding an iota of goods to the human race? In my estimation (and I'm neither a mathematician nor an economist), if we could get everybody to 'work for humanity', 20 hr/week would be more than sufficient to produce everything humanity needs - and use the rest of the free time anyway they want: education, entertainment, you name it. But everybody would have to put in that 20 hr 'work' - from the Pope, President, to the Preacher on the block. Now this I would call true 'equality'. Every human being being equal, free, and pursue the dreams of a better life, irrespective of class, birth, national origin or color.

Joseph J Jarfas
Just a 'Thinker'

Victor Paredes

VP, LatinWorks

I think their is a economic and a social response to the question.

Economic - I think that a healthy economy promotes open competition. We reach a point of distorted inequalities when we begin to legislate in favor of consolidation. We had a healthy and prosperous economy during a world in which there was healthy co-existence between national businesses and local individual businesses. Local individual has all but disappeared.

Social - inequality is never good from a social and human perspective. Now the ideals promoted by our founding documents suggest that equality is a core value of our country. The thing is, those ideals hold true under one basic assumption - a clean start from the same departure point for all people. Unfortunately, that has not been the case for much of history. Therefore, those with an edge, more capital, etc will almost certainly grow and outpace thus creating an inequality gap. So we end up with the option of forceably closing the gap or managing it. Either option will always be resisted by those with the most wealth. Even if you choose to manage it, the ability to do so ends up being limited and subjective. But in short inequality is not good for prosperity. Its not good because folks don't want to feel inferior or live inferior than anyone. If they feel inferior, they isolate themselves (and spend less) or do irresponsible things to feel equal (can we say housi
ng bubble). Plus, inequality is just a terrible human condition that inhibits social and cultural development.

God Bless America.

Steve Sheinkopf

CEO, Yale

How much is enough? Seriously. The Home Depot CEO received hundreds of millions of dollars and the rank and file pretty much suffered through the regime.

I used to be an Ayn Rand capitalist, but compassion and a better spread of wealth actually works better in business and society

"We feel instinctively that societies with huge income gaps are somehow going wrong. Richard Wilkinson charts the hard data on economic inequality, and shows what gets worse when rich and poor are too far apart: real effects on health, lifespan, even such basic values as trust."

Anne Gorman

Chair, Catholic Commission for Employment Relations

The question of equality of income is one that has been debated for decades maybe even centuries. It raises its head when the world economic situation gets so absurdly out of balance that it threatens to bring disaster even to those who don't believe in equality. As an Australian I know that we are a very small economy compared to the US. But we continue to weather economic storms without creating terrible disadvantage to the many.Most of us here 'down under' shake our heads in disbelief when we see a rich country like the US not providing the kind of safety net for those who most need it. Equality begins with a comprehensive system of fair taxation, free health care and readily available education for everyone. These are no brainers in our view. Rich people and rich corporations don't need tax cuts. After all you can only sleep in bed at a time and ride in one car at a time, more wealth for the few doesn't create mor
e wealth for the many. It just skews the economy so that the cycles of disadvantage get more acute and desperate for the many. We here at the other side of the Pacific take steps to support our citizens through hard and good times. Sweden is an example of another economy that does the same. Isn't it time we took an evidence based approach to this question of equality.

Anonymous

Funny that it's always the Harvard PhD's, from behind their cushy jobs (that they can't be removed from), making these socialist claims. I worked in Brazil for 5-6 years, made a lot of money, it's nothing like described. The government is corrupt and the reason they help the low class is to keep it there.
If you want a broad middle class, you need to have the same proven principles that created it in the USA: independence, easy access to capital, entrepreneurship, and little government rules/intervention (i.e. low cost of entry into market).
The moves suggested by this article (and by this administration), are exactly the moves practiced by many other socialists (government protects and to do so, must grow, and to grow, it must take more).
Maybe the problem is the focus on inequality. It promotes laziness and blame and finger pointing and brings down ego and self worth.

David Albert Newman

The amount of inequality that exists such that a Nash Equilibrium is avoided; that is conversely, where equality shows a Pareto Optimality.

Joe Seydl

Analyst, Wells Fargo

"What's the right amount of inequality? What do you think?"

These questions are somewhat misleading. It doesn't really make sense to speak about income inequality without mentioning economic mobility. Economic mobility simply refers to how easy it is for workers to climb up the income ladder. It is generally accepted by economists that rising income inequality in and of itself is not necessarily problematic for economic growth and social stability if rising income inequality is accompanied by a high degree of economic mobility. That is, as long as workers are constantly shifting into and out of the highest income brackets, a large and growing gap between income brackets is less consequential; because, in this scenario, every worker has a fair shot at one day entering into a higher income bracket. Simply knowing that this fair shot exists, therefore, fosters greater competition in the labor market and increased worker productivity.

Now, the issue is that there is evidence to suggest that economic mobility has declined in recent decades (http://goo.gl/JYUNH). Absolute mobility still remains high, but it is relative mobility that workers are most concerned with, and relative mobility is declining. It used to be that hard work determined labor market outcomes; however, the wealth of one's family has become an increasingly important factor determining labor market outcomes. This is unfortunate, considering that people do not get to choose the family that they are born into.

So I think the better question is, "What's the right amount of inequality, given that economic mobility has declined?" The fact that inequality has increased while mobility has declined is particularly alarming. There are two ways to fix this problem: reduce inequality (redistribute) or boost mobility by providing better access to affordable education and more stable early childhood experiences. I'd choose the latter any day.

David Lindsay

Lecturer/Tutor, Edinburgh Napier University

If reward and job satisfaction are measured in terms soley of financial income then "inequality" will always be a management tool for motivation and budgetary control -as long as the mechanism is reviewed in relation to overall performance the current hierarchical geometry of [most] organsations and their employees are somewhat captured in this process which almost naturally undermines true entrepreneurial spirit. This changes due to cultures and business models but although Anglo-Saxon in its genesis we see this model rolling out globally as a means to create "class structures" within organisations not previously exposed to this approach...pacific rim et al...it remains to be seen if the current global recession will haqve any marked effect on this "two-tier" system of reward.

Kapil Kumar Sopory

Company Secretary, SMEC(India) Private Limited

It is expected that for a greed and corruption-free society, the basic needs of every individual are met and they can have a life where off and on they are not driven to commit suicides,etc. Societies which cannot provide employment to the employables drive them to underhand means like thefts,dacoities, loot and arson. Where the poor do not get even a morsal to eat while the rich feed a lot even to their pets, unrest is bound to result.
It is the responsibility of the State to ensure that while the rich via honourable means thrive, the poor do not die for reasons which could have been controlled.
Right amount of income inequality cannot be determined under any situation because of various dynamic changes taking place every now and then.

Ravindra Edirisooriya

P/T Accountant, Midwestern Small Business

Professor Heskett's question "Income Inequality: What's the right amount?" has to be framed in the right context for the best answer (solution). Perhaps the context is simple and we take it as given but putting it on the table will yield more informed solution(s) and give insights to how it may change in the future. We assume that the engine of all "economic" growth /activity is economic profits. We assume that there is no environmental impact to any economic activity. We assume income inequality is the key to innovation and entrepreneurship. We assume labor to be an expendable commodity and the market will determine the equilibrium price of labor (assume there is no minimum wage and labor contracts). We assume that the population will increase over time. We assume technology will improve over time and decrease the labor component and increase the robotic component in any product /service. We assume the market
will decide the price of any product (service) created in the economy. We assume that there are able and willing consumers with resources (money) to purchase these products. We assume a stable political, regulatory and tax environment. We assume a stable governmental structure. We assume finite (but abundant) natural resources and our economic reach is limited to this world. We assume the natural distribution of wealth in the society is represented by a bell curve (large middle class). We assume opportunities for employment are limited and only the best qualified will get them. We assume education costs money and time. We assume the government will not have any welfare, healthcare and educational assistance programs for the citizens. We assume citizens are free to do as they wish (the government is not in their way in any form). We assume many countries will have similarly capable economies and they will compete to supply the goods and services freely to the markets. We assu
me that all humans have a right to life (sustenance), liberty and pursuit of happiness. We assume that everything has a price.

Now, we may do a sensitivity analysis on each one of the above assumptions for further (more complete) information. We know that the wealth distribution is transforming itself from a natural bell curve to an inverted bell curve (nearly complete) already. So, what is the right amount of income inequality for economic growth? On one hand, we may have to think "slow" on it, given the size of the economic system. On the other hand, if we may think "fast" on it, the right amount of income inequality (minimum income) is as much as (as little as) putting bread (and no butter!) on every human's table: they will beg, borrow and steal to satisfy (their) all other needs (and wants) and the humans will keep the (global) economy growing. However, if their economic backs are broken, they may permanently withdraw to their own world based on a barter economy: beginning a tale of two societies and two worlds with very little interaction (except to beg, borrow and steal fro
m the haves by the have nots). Is it not happening now?

Christian Miller

Retired, Self

I believe that a floor is more important than a ceiling. Start by ending poverty and it can be done by taking more money from the rich and giving more money to the poor. The mechanism? Federal Social Security in the form of an annual payment of an unconditional $13,628 to every citizen to pretty much assure everyone being above the Federal Poverty Level (FPL). Pay for the $3 trillion cost by eliminating all federal welfare related programs and going to a universal flat personal income tax of 18% with no deductions. Numbers work. see www.federalincomesupplement.com

CJ Cullinane

Extremes in almost any area of economics and wealth (or politics) cannot be a positive factor for any country or business in my opinion. There will always be innovators and risk takers who amass great wealth and most often make many others wealthy. The problem occurs when wealth accumulates in the 'pockets' of a small percentage of the population that may not have earned the rewards of innovation and wealth creation but accrue the wealth by position, and financial manipulation.

I believe true wealth is created by being value added, such as producing, innovating, and/or building something. Without a "middle class" that produces and is rewarded for their effort the wealth cycle would end. The middle class are the customers and end users of the innovators. "The One percent" of the population can only buy so many cars and houses. A strong viable middle class can be a more stable driver of an economy and insure consistent growth. I personally believe the present trend raises a "Red Flag".

Wayne Brewer

I think that the premise of the question is flawed.

The way income equality is measured assumes that the income for the lowest income earners stays low and the income for the highest income earners grows and the people in those two groups stay the same. This is not the case. Folks move up through the quintiles of earnings all the time, usually with more than 70% of them moving at least two quintiles up within a given 10 year span. Only 3% of all US earners stay in the lowest quintile more than 10 years. More than half of the top quintile earners drop out of the top quintile every year and are replaced by other people. On top of that, these income data do not include government dispersements which make up over half of the lowest quartile true resources they could spend but don't count as income in these statistics, severely understating the true lowest quartile.

I think a little research into the data will show that the reason income inequality (even defined in this flawed way) has gone up in the US for the past thirty years is because income is strongly correlated with age and we have a huge cohort of baby boomers that started earning lower amounts of money in their first jobs about 30 years ago who are now in their peak earning years.
This metric of income inequality causes meaningless chasing of rainbows that I think ultimately hurts economic growth because it portrays a false problem that appears should be fixed through redistribution...which we keep getting more of. This exacerbates the normal tendency for people to base their happiness on comparison to others...they are going to be less happy if they are falsely told they don't earn what their efforts are worth.

I would argue that any redistribution at all is economically inefficient since by definition it has to be arbitrary and in that case would mean that resources are being artificially diverted from higher return activities that could be working to increase the standard of living for everyone...making everyone's tomorrow better than their respective today's.

Joe Seydl

Analyst, Wells Fargo

@Wayne Brewer

Can you please provide the source for your relative mobility statistics?

You say: "Only 3% of all US earners stay in the lowest quintile more than 10 years."

This is not consistent with a report published by the U.S. Treasury a few years back (http://goo.gl/ydERd). According to that report, 55 percent of workers starting in the lowest quintile in 1996 remained in the lowest quintile by 2005. We wrote a report - which is currently under consideration for publication in an academic journal, so I do not have the link - using a similar analysis as current as 2009. In our report, using PSID data, we found that 57 percent of workers starting in the lowest quintile in 1999 remained in the lowest quintile by 2009. So our findings were consistent with those of the Treasury. One other point that I would point out is that our findings show that a smaller percentage of workers seem to be making big moves out of the lower quintiles. The Treasury report showed that of those who did make it out of the lowest quintile, a healthy proportion was able to make it into the top quintile. We did not find this to be true in our analysis. Perhaps the 2007
-2009 recession had something to do with this outcome.

As I said before, income inequality is not problematic if mobility is high. But there is evidence to suggest that mobility has weakened, particularly over the past decade.

Best,

Joe

Tom Dolembo

Founder, New North Institute

Inequality of income (concentration to the top .1%) beyond pure inheritance or lottery wins in the US has been largely due to financial gaming, not productive participation. Henry Ford aggressively paid his workers well (at first) to build a market for his cars. Apple, Marion Labs, and many startups paid huge benefits in equity participation to secretaries and directors alike. These were generative pass throughs of wealth, not taxes redistributed. The current inequity has placed capital in dead ends, people who did not and will not produce anything useful and banks who do not lend but do wager.

Generative wealth concentrates money in good places where it is redistributed within the capitalist system to partners, associates, and builds investment in ideas and products. Brazil has done wonders here. The US, however, has congested its capital flows. Banks are incented to build pools of reserves without lending, capital markets continue to seek phantom yields instead of production. This has stifled growth and taxes up or down won't help it.
There is a glimmer of hope. Money (I believe) always finds an outlet, greed always falls to revaluation, and the cash on the sidelines will redistribute regardless. What is disturbing in the US, and also the European model, is the belief that the dead end capital trolls are stabilizers, reserve sources to buffer volatility. Stagnating capital invites revolution at every level. It is most disturbing that our situation in the US has no champion. Money lives and breathes and is a dragon that will not be contained. This will be a noisy spring.

T. Reilly

Director, Corp. and University

Another parabola that needs to be drawn: The points on the curve which would describe the decline of democracy as the recipients paying in nothing in taxes but receive redistribution goes from 40% to 50% to 60% of the population. That dynamic will flatten the parabola discussed in the article.

Kamal Gupta

CEO, Edseva

It would be useful to see some more research on this. For example, Income Inequality across various age groups.

I did a little bit of private research myself in India. I found that people's response varied a lot depending upon their age. People less than 35 were far less tolerant of inequality in incomes within their age groups.

On the other hand, elder people (56- 60, since 60- 62 is the retirement age for most people in India) were less tolerant of the higher incomes the younger people are making.

A common refrain was "That at their age, we used to slog like crazy in uncomfortable work places and make a third of what they get. Yet it is us that brought them up. And they spend money on luxuries without sparing a thought for their elders".

Wayne Brewer

@Joe Seydl

btw- the treasury report you cite removes all taxpayers under 25 yrs old to remove the effects of people going from work to school from the income mobility percentages. That's a large impact on the percentages that you are comparing with mine. Education is the greatest accelerator of income mobility so I don't think it should be removed if we're trying to represent reality. Wouldn't you agree since you advocate affordable education to increase income mobility?

regards

Wayne Brewer

@Joe Seydl

Thomas Sowell discusses this topic in several of his books. His book "Basic Economics" does a great job explaining very basic cause/effect relationships in the economy with specific and well known examples.

Robert Carroll also has similar statistics compiled for the 1999 to 2007 timeframe. Both use IRS data for individual taxpayers to map the movement of individuals throughout the the quintiles rather than the quintiles themselves, which can be easily misrepresented in headlines by non-statisticians.

Are you at liberty to share the analysis you've done?

Andrew Mathews

Just Retired Thinker, Newstoons.Com

The term "Income Inequality" itself, in my humble opinion, is a "hate-provoking" Marxist semantic weapon to bring down capitalist system - the only real equalizer in a free society. After 50 years of productive work (13 years in India and 37 in USA) I have a meager $750 a month coming as pension and I would have loved "Income Re-distribution" for needed additional income, yet I will not promote it at any cost because I am an informed citizen and the naked truth is that INCOME RE-DISTRIBUTION is possible only AS LONG AS SUPPLIES LAST!!

The success of any civilized society depends on informed people working together sharing their REAL WEALTH which "Mother NATURE/father GOD" has already distributed evenly and will continue to do so for the future generation. And that wealth is T I M E - twenty-four hours for every man, woman and child.

The world has used HATRED for generations in the name of distribution and re-distribution but it never worked. We have to look for other new solutions. I am sure HBS students will come up with a few!

Sincerely,
Andrew Mathews

Joe Seydl

Analyst, Wells Fargo

@Wayne Brewer

One of the most difficult challenges related to measuring mobility is to control for age effects. It is standard practice to exclude workers under the age of 25, because if you were to include such workers, obviously they would show up initially in a lower quintile and then perhaps jump into a higher quintile as they reach their prime-working age. However, we would not classify this movement as upward mobility; rather, the jump from a lower quintile would be primarily due to age effects and not earnings power per se. So we exclude these cases at the bottom of the age distribution to control for this. Similarly, we exclude cases at the upper end of the age distribution: As workers become elderly and retire, obviously their annual income is going to drop, causing them to fall into a lower quintile. But this is not because of mobility effects; rather, this is because of retirement effects.

In our study, we considered only workers between the ages of 25 and 45. We divided our analysis into 4 cohorts to examine 2 cross-cohort comparisons: (1) 1968 to 1979 vs. 1988 to 1999 and (2) 1972 to 1982 vs. 1999 to 2009. We used a share movement technique whereby we separated our considered households within each cohort (sample size = 2,000+ with PSID data) into five quintiles, based on the total income earned by each household in year one. And then we examined how each income group's share of the total income earned by all income groups changed through time, comparing those changes across cohorts in an effort to reveal trends in relative intra-generational mobility. I would be happy to share the entire paper after it's published. The general finding is that relative intra-generational mobility remained healthy up until about the 1999 to 2009 period. Again, the 2007-2009 recession likely had an effect on mobility.

The key to improving mobility is to improve educational experiences at the earliest age possible. Those who are born into poor households tend to have weak mobility because they lack guidance, adequate nutrition, and stable early childhood-development experiences.

Phil Hyland

retired

Inequality based on value creation is acceptable in Society. However a society which bases high income on short term rewards e.g. Enron, and some bankers who are then rewarded by Government bailouts to avoid economic collapse (Obama had no choice) will result in a society were greed rules be it on the street, middle management or CEOs. This means the best minds do not go into value creation but instead into wealth creation. An example could be a politician who opposes "Obama care" but accepts lobbying funds and a generous government ran health care plan.

Shann Turnbull

Principal, International Institute for Self-governance

A more meaningful question is how might inequality frustrate prosperity without growth?
Sustained economic growth as currently conceived and promoted is not feasible with a plague of people on the planet that has diminishing non-renewable resources per person.
Without little growth, no growth and even de-growth, prosperity will become increasingly dependent upon greater equality in sharing national income.
According to the UN 20 advanced societies already have declining populations reducing the need for investment to replace existing infrastructures. Employment is reduced to result in de-growth. The UN expects this will spread to most countries this century.
In addition, people are living longer to require income support and medical care longer and longer. The percent of productive individuals will decrease even with growth and more so with de-growth.
Increasing poverty and envy in the information age will make gross inequality socially and politically unacceptable.
The only way to share national income without bigger taxes, bigger government and bigger welfare is to make everyone a capitalist to obtain a universal minimum dividend for all citizens.
Reduction in corporate taxes would provide a way to achieve prosperity even with de-growth as described in my 1975 book "Democratising the wealth of nations" available at http://ssrn.com/abstract=1146062. An updating paper on "Sustaining society with ecological capitalism" is available at http://ssrn.com/abstract=1954920 being presented next month to a Danish conference on "Designing and transforming capitalism"

Wayne Brewer

@Joe Seydle
Thanks for the dialog. I do think the recession had to have a big effect on mobility in your study. How could it not? Also, I think your analysis, because it uses household incomes, is biased in a way that affects your conclusions because households have fewer people in them today than in the past...due to increased standards of living (for just one example, think how much a VCR costed in 1979 and how ubiquitous the ability to watch movies on just about any device is today...that's not captured in any numbers or stats that I know of). And it appears that since you are examining groups of data instead of individual households progressing through the quintiles, your conclusions ultimately have the same flaw I mentioned earlier...they can support headlines in line with the media narrative buttressing redistribution, but for real actionable policy recommendations, what, other than trying to help disadvantaged kids get better opportunities (which it doesn't directly point out) do
es it do? I agree with your conclusion, btw. I can see how the experiences of kids relating to nutrition, education, development experiences surely impact these data. But since there is a huge culture component to how kids are raised by their parents, where would the line get drawn before the state decides it needs to raise kids instead of the parents? Are we getting to a point where we're willing to tell parents that their culture is wrong? Sam Harris has some books about this topic and briefly discusses it on a TED talk. It's interesting to think about but I think a scary place to be headed.
The article by Scott Winship is interesting because it elaborates the absolute and relative effects of mobility and looks at mobility from a standpoint of statistical chances of being in different earning quintiles than your parents. I still think it misses the point, though. Its conclusions point out that if your parents are from a lower income quintile, you are likely to be there as an adult, as well. Not everyone can be in the top quintiles by definition, and unfortunately, there are factors that make the ability to contribute to economic growth different for different people...only one of them is opportunity. There is motivation, culture, values, luck (many forms of it) and others. I would argue that there are so many factors involved in those differences that the best way to approach it is to make the rules the same for all and therefore in an absolute sense, have a level playing field based on how the "game" is played. Any other approach starts down the slippe
ry slope of the ends justifying the means, and therefore a race to mediocre economic results.
It seems that just about every issue in politics has a lot to do with the starting point of those involved...whether individuals, groups, countries, etc. This always leads to something being unfair based on comparing results between those entities without their respective starting points being considered. There is a tougher question here that delves into philosophy in a tough-to-define way...what is fair and from whose viewpoint is it measured? In one class I took in B-school we came up with one definition of fair being the "absence of envy". From the standpoint of the discussion we're having on this blog about the question of income inequality, the whole question implies that envy is what we should reduce to increase economic results. Envy, and greed, which many others on this blog have commented about, as well, are two sides of the same coin and neither should be considered when thinking about economic policy, in my opinion. Since we can't eradicate them from huma
nkind without removing what makes us human, let's use them to our greatest advantage. With a truly level playing field for all, let envy drive those with a less fortunate starting point to succeed and greed topple those with a better starting point if they try to increase wealth without increasing value. It's all about making sure risk and reward are coupled so that the most value is created for all. Worrying about how the pie is divided is a far less productive concern than allowing the pie to grow, unless you are a politician. Politicians have different "economic" incentives than citizens. But that is a discussion for a different question from Professor Heskett.

Joe Seydl

Analyst, Wells Fargo

@Wayne Brewer

I appreciate your input. You make some good points. As a technical note, the PSID is a panel data survey, so we are in fact examining individual households as they progress through quintiles. The IRS dataset that the Treasury uses is also a panel data set.

I agree that we don't ever want an equal society. That would restrain productivity growth and crimp incentives. And, of course, envy is a useful tool that can be used to motivate workers. But in order for children born into low-income families to envy their wealthy counterparts, there needs to be competition. Educational experiences between lower-income and higher-income children are so different at such a young age that competition between children born into lower-income families and those born into higher-income families is practically nonexistent. In the poorest communities and school districts, all of the children from low-income families are lumped together, while the children from high-income families enjoy all of the resources in the world in the best private and boarding schools. I'm not trying to start a class war here, but where does the envy and thus motivation come from in the classrooms in which low-income students study? They don't even interact with their highe
r-income counterparts. They're not going to have figures to envy when everyone around them is in a challenging socioeconomic situation. Instead, they're more likely to adopt bad habits and get involved with crime and drugs, because that's what everyone else is getting involved with. The point is, in order for envy to motivate those born into lower-income households, such students need to be at least able to "see" and "interact with" their counterparts from more privileged backgrounds.

Anonymous

When looking at income inequality in a society, it is important to note that the ratio has two sides - a high end and a low end. It's not just about howm many rich people there are. America is a country in which nearly 25% drop out of school, and are unable to find decent employment in a largely post-industrial society for which education is a prerequisite for meaningful participation. Until we find a way to address the failure of that 25% of our citizens to get an education that equips them for employment, they will continue to be disadvantaged and income inequality will be at least twice what it would be if we fixed that one societal failure.

Anonymous

Your premise - as that of the study - appears to be that we in the United States still live in a free-market economy and that capitalism, and not State intervention through regulatory autocracy and 'czars' up to outright control of industries and nationalization of companies - and its creation of oligarchies and industry cartels through cronyism - is to blame for income "inequality".

Rather than assume that income inequality causally affects growth, it is critical to consider that the gross inequality of income we see today is instead the direct outcome of this type of malignant State-sponsored growth which has resulted in the now near total destruction of our middle class.

Of course, the US taxpayers' squandered $15,000 billion debt used, in part, to bailout failed enterprises and financially reward the crooks in charge has something to do with the vast range of incomes we see in the US today. As does the $trillions which the Federal Reserve has counterfeited to inflate our money supply and given to its member banks and the friends of our government. For these reasons, not to mention our self-destructive immigration policies and the essential amnesty of 20 million or more illegal aliens by a federal regime bent on open borders globalization and destruction of our national sovereignty, it is no coincidence that the US now resembles much lesser-developed countries.

Malignant growth such as this therefore generates haves versus have-nots; the Marxist class warfare theme of the US democrat party. By their assuming that capitalism is still operative, their tirades against income inequality are their means of trying to fully discredit and therefore eradicate the last vestiges of capitalism in the US. Then, as according to Marx, only after capitalism has "run its course and destroyed itself" can they bring about their God-Is-The-State workers' paradise.

What is the "right" amount of inequality? By whose standards? That is the question you must answer.

Only an all-powerful State as the US is rapidly becoming - or a truly free market as we once were intended to have been - can set labor prices. There is no third alternative. There are night-and-day consequences as to which does. History has proven countless times that when the State decides, the economy and freedom itself are utterly destroyed. Stand by.

Anonymous

A reasonable hypothesis (for which I have little evidence) is that the economic benifit of inequality is maximized when it carries as much information as possible.

If we believe that the benefit of inequality is that it rewards top producers and punishes the unproductive, we should look for a place on the inequality spectrum where the signals are the strongest; that is, where the signaling effect is distinguished as sharply as possible from the "noise" of random assignment to economic levels.

Following work of Shannon in the 1940s, it seems likely (again, a plausibility, not a calculation) that this point is achieved when economic level (not income or wealth) is uniformly distributed --- for instance, where every income interval of fixed length captured the same number of people.

Spencer Bader

Is the level of equality/inequality a cause of economic growth or is it a result of economic growth? Another basic question is whether equality or overall increase in wealth is the appropriate goal ? Equality of opportunity and policies that promote a strong growing economy (including low unemployment) have increased wealth and the standard of living for the middle class. Thus I would argue that the question of the right amount of equality is not nearly as important as "How do we raise the level of wealth?" If we successfully raise the standard of living and level of wealth, the differences in equality become significantly less important, except at either end of the 0 to 100 scale.

Anonymous

With the advent of social media, societies with concentrated power or wealth at the top are at risk of, at a minimum, demonstrations, or, if the situation is unchecked or unaddressed, revolution. It has yet to be proven if the Occupy Wall Street movement, fueled by the discontent of the 99%, will have a sustained impact on our politics and, joined by disaffected Republicans, ultimately form a third party. Things are very unstable right now. It will be interesting to watch

Susan Rushworth

Lecturer, Swinburne University of Technology

A decade ago, I was a researcher on the Global Entrepreneurship Monitor. We were provided with a database of national indicators, such as GDP growth, GDP per capita, unemployment levels - a range of well over 100 variables. The Gini coefficient was also included.

Exploring for patterns, we discovered the single strongest correlation was between rate of GDP growth and income inequality - in other words, the faster the economy grew (as measured by GDP), the greater the income gap.

Food for thought...

Murray Kenney

Partner, Raven Asset Management

If the standard of living of the bulk of the population is not improving, and all of the gains in income are accruing to the top group, then inequality is a problem. The question should not be "how unequal is the society", it should be "how are the bottom 20% or 40% doing?." In the 90s, great fortunes were made, but unemployment was falling, government spending on social programs was increasing, median income was rising and nobody talked about inequality. Inequality paired with declining prospects for the average person is a problem.

Paul Lepley

HBS '71

This comment concerns your question: What's the right amount of inequality?

I can't imagine anyone deserving an earned-income greater than 50 times the median earned income. My understanding is that it used to be that top-paid executives earned only 35 times that of the lowest-paid. Whatever the ratio was from 1950 to 1990, that seemed to work pretty well. I think that would be a reasonable amount of inequality and anything beyond that should be heavily taxed.

At the same time, I would not deny any individual from accumulating substantial wealth from actual stock ownership (not stock options or other derivatives, which are a facade for boosting income).

Eric Swanson

Retired

Income inequality is an irrelevant issue/concern -- it amounts to nothing but envy. The proper issue is do people have enough economic resources to sustain and provide for themselves. The fact that someone may have 10x more income/wealth or 1000x or a gazillion times more than someone else does not matter at all to the less well-off person, unless the goal is to justify stealing. Let's be realistic -- the United States in the 21st century is hardly 18th century France where the peasants are starving with no way to advance themselves and the aristocracy rules with an iron fist. The average middle class family in the US -- even the average family in poverty (as declared by our government) -- has the highest standard of living ever known to man with material comforts unimaginable even 50 years ago.

The reason this issue is being discussed is because we have leadership in the White house and Congress (and I include many Republicans in this) that have chosen to advance their own political interests by appealing to the the voters' basest instincts of envy and division. The cry "the recession was caused by greedy bankers!" is another example of this behavior.

I am surprised that HBS would stoop to dignify this intentionally divisive issue, but I guess I should not be.

Anonymous

To me this is the wrong question. This is a moral and constitutional question that goes to our founding. First of all, someone else's success doesn't limit my opportunity for success or happiness. There are many assumptions in the question posed: Does more income drive happiness, or equal opportunity? The larger issue is that enforced income equality is an an abridgment of what I'd consider natural rights, just like free speech and religion. I should have the right to my own time, and regardless of whether someone thinks I have enough money, why is a tax rate of 50% different from being 50% someone else's (or societies) slave? You can argue this to the extreme and I'm not arguing for a completely flat tax, although I do prefer that, but I do think distribution of money is best done by the individual, and later the most local government possible. Less money should be taxed and it should be flatter the less local it is. Part of our i
ssues in my opinion is that we think equal outcomes is "good" and the goal. While not poor, there are people making over a 1000x more than I make. My happiness has nothing to do with that. I personally think what makes humanity great and interesting is the great diversity visible in it. We have different interests, definitions of value, resources, and strengths to offer. The marketplace, while not perfect and needing certain regulation and protections, is the most moral way of finding a value equilibrium that promotes the freedom that we can have different values. It's dynamic and supports local differences. We all value different things and government by definition creates a shared value definition and we lose the differences and thus our freedom. We all are willing to sacrifice some for the sake of common values, but I'd argue that government as we know it now and the view of income equality suggests a delegation of personal freedom to a few aristocrats, no diff
erent than kings or totalitarians.

Steve Flick

If money had a shelf life like vegetables or fish, it'd have to be distributed more equitably.

shadreck saili

UCT

My view is that income inequality both promotes and stunts growth depending on the development parameters that one is faced with. The question of 'right amount ' is a greatest mathematical problem that in my view every manager of a company/economy is employed to establish for the purpose of maximizing returns either social, economic or other wise.

To substantiate my claim, i would argue that in an economy where market is a driving force of growth, due to many factors including population, a reduced disparity of income in ideal to enhance growth, however if inequality is high, that will stunt growth. i have in mind the Chinese model of income distribution visa vis economic growth and population.

On the other hand, equal distribution of income can stunt growth in highly developed economies such as US, Europe where such distribution have the tendency of reducing productivity. I have a strong feeling that productivity flourishes where income disparity exists to a greater extent . As per a capitalist phenomenon, you can only get richer by disadvantaging another. If you can't find the natural disadvantage to take advantage of, create one i.e through acquisition, destabilizing , wars etc

A while ago i was reading an article where the launch of 2011 Ford Ranger Wildtrak done in Europe will be produced in South Africa, Argentina and Thailand and will be offered in more than 180 markets worldwide. I ask my self why South Africa, Argentina and Thailand. Certainly among the reasons is income distribution - disparity -that has to be taken advantage off in production.

Guy Higgins

Principal, Performance Squared

Inequality in the distribution of wealth is necessary for there to be progress. As an engineer, I'm going to make an analogy with thermodynamics. If the energy in a system is completely concentrated in a single location, you have an unstable system and a strong likelihood for a rapid, perhaps explosive outflow of energy -- so strong that little work is done and most of the energy is wasted (think the collapse of the Romanov dynasty -- how much of their wealth was wasted in the chaos of the Russian Revolution?).

If the energy in a system is evenly distributed everywhere, it is impossible for work to be done since there are no energy gradients and no way to put energy to work doing useful things. This is like the Soviet Union in the late 1980's. People pretended to work and the government pretended to pay them. No motivation, no effort.

Like all analogies, this one is suspect, but possibly useful. What is the right level of "inequality." I don't think that there is any way to calculate what that level is -- the system is contains far too many variables and the equations are far too few to yield a "closed form analytic solution" and probably can't even be adequately dealt with through computer simulations.

So, rather than someone (the government) trying to do the impossible here, perhaps we should be focusing on trying to understand what the incentives should be that support a useful and perhaps better level of inequality. Why do certain executives get such lavish salaries and bonuses and why don't they ever seem to lose them, independent of company performance? Seems to me that we need to understand that. I don't think that a free market in corporate leaders would support the kind of compensation packages that now exist -- if I'm right, what are the forces constraining that leader-free-market? I suspect the constraining forces are behavioral and not information-related. There's a topic for a study.

Anonymous

The term and whole concept of wealth distribution implies that government of some other entity owns and is responsible for the wealth. This causes me great concern becasue government cannot create anything. They can only take from the people their hard earned money and redistribute it at their own discretion, less of course their inflated overhead.

Anonymous

I could be utterly wrong, but I see inequality as a given trait of the human specie (actually, of living beings: after all animals have hierarchies too). And I also do not believe that inequality as such is a problem. It depends on the nature and level of it.

For example, inequalities in a society in the form of different income levels, are fine as long as they are rational. I don't think we can expect a desk assistant with no experience to earn as much as a senior manager or academic based on the tasks, risks and level of education/experience it requires. Wouldn't it be unfair for the latter group who invested in studies and work? In this case inequality is a motivator and works in the favor of individuals and society as a driver for continual improvement.

This inequality, however, is only "positive" when not hindering growth and motivation: universal medical health system, accessible education to all...etc. are a must. Otherwise one maintains (actually increases) the "lower classes" and increases resentment.

However, in the case of footballers, televised singing contest winners and all similar entertainment/sport people, that is a different kettle of fish, that horrifyingly looks like the roman "bread and wine" approach. Let "them" watch something entertaining and they will forget their own squalor. Terrifying. Footballers do not contribute to society to the level (millions), they are paid. On top of which it breads an illusion amongst youngsters of fame and fast money, which works against values of studies, work, long-term efforts...and of course, sustains wider inequality.

This might just be another misconception but, communism tried the "all equal" approach and as far as I know (do tell me if I am wrong) every single one of their practical examples has failed. To me it is like a Marketing Strategy, which overlooked one key given factor: human nature. Great on paper, doesn't survive the practice.

At the end of the day I don't think there is a black and white answer. One of the reasons why bringing it up amongst friends over diner can spoil dessert. However, the most important factor is to keep bringing it up, discuss it, try approaches to always have it mind and try improving.

John Wilson

Retiree

As someone looking on from outside the USA, I'm encouraged by the broad consensus amongst your contributors that things have 'gone too far' and that fairness should be the stated aim of both the private sector and government.

It may be impossible to state in precise terms where on a parabola the 'right' answer lies: but it doesn't take exactitude to say when something is just plain wrong and needs fixing.

Roy Morien

Academic, Naresuan University, Thailand

I have no idea what the "right amount of inequality is", but I have been a Libertarian since teenage years, and I have always accepted inequality of income as inevitable, as a result of talent and drive and entrepreneurship at one end, and lack of talent or ability, or sloth or whatever, at the other end (whilst maintaining a charitable attitude towards those 'in need'). BUT that is not what is happening today. It is a disgrace and a stain on the society that senior executives and CEO's, for example, can be given huge salaries and bonuses when their organisations have been saved from bankruptcy with Government handouts at taxpayer expense ... their stewardship has been so lacking that the organisation was on the verge of collapse, and they rushed to the Government for handouts like the most pitiful of beggars (who do not ride in private jets with their begging bowls, though) to save them from their own incompetence and in
eptitude and shady practices, then to use that money partly to pay themselves grandly for a job not done!

This crony capitalism and government intervention to save the skins of the wealthy elite and the bankers, who caused the problems, is the disgrace and shame that needs to be eradicated. THEN maybe we can ask the question What is the right amount of inequality? when the playing field has been cleared of the cheats and shady characters and slick operators and millionaire incompetents with their hands stuck firmly in the 'government honey pot'.

Clark Phippen

Director, Venture Capital firm

Still consider a 10x spread in salary between an average skilled line supervisor and an average VP at the "senior management" level is a good measure for "fairness". Numbers outside this range are acceptable for ground level new employees and top management. "Pay" outside this general rule (merit bonuses, stock awards, etc.) should be Board-directed on a case-by-case basis.

Brian Scott

trustee, Camfed

It is absurd to argue that inequality is a concomitant of freedom. If people want more freedom than Western democracies provide, then they should go to Haiti or Nigeria, where the state is weak, regulations are few and generally intermittently applied, and so everyone is very free to do what they want. The result is not increased prosperity. However, the strong and the criminal do much better than the weak and unlucky.
Economies, and civilisation in general, will prosper when citizens cooperate. Cooperation requires mutual trust. If I see my neighbour gaining hundreds of times more than me from the system then I am less likely to trust and cooperate with him/her. Of course, some degree of inequality is inevitable, and desirable (eg to provide incentives and reward initiative). The question is how much; and developments over the past 20-30 years in the US and UK have pushed inequality too far - hence the manifest reduced social cohesion.

Jack D. Pond

Former Government Official, Speaking as a Private Citizen

This is a fascinating discussion with almost all points well considered and respectfully submitted - a commendation of both the readers and commentators.

One point missing from these discussions are a trend-based analysis of which class is actually emerging as the "winner" in the growing inequality versus an anecdotal "rich capitalist" assumption. Is it possible the class that benefits primarily from the magnification of government versus is not the Capitalists (as assumed in many of these response), but by the "government in the wings"? And by this, I DO NOT mean government workers, I mean the class who live and profit through the support and propagation of government bureaucracy and legislative spaghetti factories that comprise the Federal government - lobbyists, analysts, "project management", compliance specialists, . . .

In 2011, Washington DC became the "richest region" in the United States, taking that title from Silicon Valley.

Last year (2011), 280,000 government workers lost their jobs, yet government spending continues to consume our economy unabated. Last Friday (2012-01-13), the President announced the intention of slashing Defense programs - but asserting the overall defense budget would continue to rise.

Perhaps in our rush to create a "more fair" government, we are actually creating an oligarchy reminiscent of the Courtier French Government in the 1750's where the wealthy and powerful perpetuated a disconnected Court-based society that perpetuated and grew wealth among the Courtiers, while placing an unbearable burden on the producers.

Under the guise of promoting equality, it is apparent the results are the exact opposite.

Maybe we truly need a more pragmatic versus idealistic approach to government:

"An idealist is one who, on noticing that a rose smells better than a cabbage, concludes that it will also make better soup." -- H.L.(Henry Lewis) Mencken(1880-1956)

David Physick

Consultant, Glowinkowski International

I can't lay my finger on it in my files but I feel sure Charles Handy wrote a seminal article in HBR ten or years ago questioning what business is for in which he contemplated this same issue. I think he remarked that once pay at the top exceeded 20x that at the bottom stresses emerged from the sense in inequality. That we now see multiples of 200 times indicates why we have the issues we do. If a company is massively successful, then it is not just due to the work of the CEO. Everyone has contributed and deserves equitable reward. If the company has delivered poor performance then that is more likely due to the CEO's ineffectiveness than than it is due to that of the front-line worker. There should be no bonus paid in such situations - how can you reward failure. Another key factor is that one year's (quarter's) performance shouldn't be the major influence on reward for senior managers. If the work of Elliott Jaques and h
is view about the time it takes to judge the successful realisation of the top-person's long-term vision is valid, then their reward must be held in trust over that period of time, perhaps 10 years or more. Finally, remuneration committees need to comprise representation from all stakeholders to the business not just 'friends of friends' all sitting at each others' tables.

Anonymous

The causes of income inequality are complex and not very well understood. Our tax laws perpetuate the problem by taxing some income as "earned" and other as "passive". Also, "passive" income does not attract Medicare and Social Security taxes. My suggestion is to treat all income as equal and tax it the same regardless of source. Then everyone is swimmming in the same pool. Additionally the tax code should be revamped, more progressive and eliminate all decudctions. In this manner there would be equality in taxation and a more level playing field treating capital income and sweat of the brow income the same.